Debt Consolidation for Homeowners

If you are a homeowner who is interested in debt consolidation, you can achieve it by tapping into the equity built up in your home. There are two ways you can go about this.

Cash Out Refinancing
When you opt for cash out refinancing, you are taking out a loan on your house for more than it is worth. You use some of the money to pay off your existing mortgage, and use the rest however you see fit. While most people choose this as a method of debt consolidation, others use a cash out refinance as a means of paying for college, a vacation or improvements to the home. Although you are free to spend the money as you wish, financial advisors urge you to spend it with the goal of reducing your debt and not adding to it.

With a cash out refinance, you want to make sure that you are getting a more favorable interest rate than the one you already have on your mortgage. This is one of its main advantages, along with being able to write off the interest on your tax return next year.

Home Equity Loans
A home equity loan is an additional mortgage on your home, unlike the cash out refinance which replaces your first mortgage entirely. This type of loan is usually easier to qualify for since you place your home as collateral. It is important that you understand the risk involved before taking out a home equity loan. You do stand to lose your home if you can’t keep up with the payments.

This type of loan differs from a home equity line of credit, which is a revolving credit account that you can draw against as the need arises. If you are trying to get out of debt, it is better to stick with a home equity loan. You receive one lump sum when your loan gets approved and you can use that to pay off all your other debts. There is no temptation to add to your debt if you don’t have additional funds available.

Like a cash out refinance, the interest you pay on a home equity loan is tax deductible. This is not the case with credit cards, so this is another thing in favor of using a home equity to loan to pay off debt. You will also enjoy a lower interest rate than most credit cards typically charge.